Press Releases

Holds hearing looking at giving colleges and universities “skin in the game” so they share with taxpayers and students in the risk of student loans

Posted on May 20, 2015

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“If colleges and universities have this incentive, it may not only help students make wiser decisions about borrowing, it could help reduce the cost of college -- thereby reducing debt.” –Lamar Alexander

WASHINGTON, D.C., May 20 – U.S. Senator Lamar Alexander (R-Tenn.) today said that giving colleges and universities “skin in the game” so they share with taxpayers and students in the risk of student loans could encourage colleges to help students reduce their overborrowing and complete college more quickly, as well as encourage colleges to be more efficient with costs so tuition rises more slowly.

“What might colleges do with this incentive? For example, colleges might encourage students to complete their education more quickly. Today nearly half of college students take longer than 6 years to complete any degree or certificate or never finish one at all. Completion is important – according to the Department of Education, nearly 70% of those borrowers who default on their federal student loan never finished their education.”

He added: “The University of Tennessee Knoxville now requires all students to pay for taking 15 hours a semester. That’s higher than the 12 hours per semester required today to receive federal aid. The UT Knoxville chancellor tells me that students are finishing college faster – and that means with less debt.”

Today is the third hearing the Senate education committee has held this Congress on the reauthorization of the Higher Education Act.

The chairman’s prepared remarks follow:

It is never is easy to pay for college, but federal taxpayers have made it easier than many people think.

About half of our country’s 22 million undergraduate college students have a federal grant or loan to help pay for college.

Nearly 9 million receive a federal Pell grant of up to $5,730, which they don’t have to pay back.

For low income students, this is enough to make each year of college education tuition-free with some money left over. The average community college tuition is $3,347 per year.

It is also enough to get a head start on a four year degree. The average tuition and fees at public four-year universities which 38% of students attend is $9,139 a year.

In addition to these Pell grants, next year taxpayers will lend about 8 million undergraduate students $100 billion in new student loans at an interest rate of 4.29%. Students do have to pay back these loans.

And the terms for paying back loans are generous – you can pay your loans back like a mortgage over 10 years, or you can enter a program that allows you to pay it back as a percentage of your income over 20 years. If the loan isn’t paid off by then, it is forgiven.

While we hear a lot about students with debt of more than $100,000, that is only 4% of the student loans and more than 90% of those are graduate students.

The average debt for an undergraduate graduate with a four year college degree is about the same as the average auto loan in the United States, or around $27,000.

For that investment, the College Board says that you will earn an extra $1 million over your lifetime with a degree from a 4-year college.

Still, some students have trouble paying back their debt.

According to the Department of Education, of the more than 41 million borrowers with outstanding student debt, about 7 million, or 17%, of those borrowers are currently in default– meaning they haven’t made a payment on their loans in at least 9 months. The total amount of loans currently in default is $106 billion or about 9% of the total outstanding balance of federal student loans.

Over the long haul, the federal government collects on most of these debts, one way or another.

But it’s clear some students borrow too much and this hearing is about how to discourage that.

We’re looking at several ways to address this problem:

The FAST Act, which several members of this committee introduced, would ensure that part-time students aren’t able to borrow as much as a full-time student;

I am exploring changing the law to give colleges the authority to counsel student loan borrowers more frequently or limit the amount of money that could be borrowed.

And today, we’re talking about a third way to address over-borrowing -- that is, ensuring that colleges and universities have some responsibility to, or vested interest in, encouraging students to borrow wisely, graduate on time, and be able to repay what they’ve been loaned.

If colleges and universities have this incentive, it may not only help students make wiser decisions about borrowing, it could help reduce the cost of college -- thereby reducing debt.

What might colleges do with this incentive?

For example, colleges might encourage students to complete their education more quickly.

Today nearly half of college students take longer than 6 years to complete any degree or certificate or never finish one at all.

Completion is important – according to the Department of Education, nearly 70% of those borrowers who default on their federal student loan never finished their education.

The University of Tennessee Knoxville now requires all students to pay for taking 15 hours a semester. That’s higher than the 12 hours per semester required today to receive federal aid. The UT Knoxville chancellor tells me that students are finishing college faster – and that means with less debt.

I have also encouraged colleges and universities to explore a three year degree for well-prepared students.

I spoke at a graduation ceremony at Walters State Community College last week at which one student received both his community college and high school degree at the same time. Because of this dual enrollment, he is entering Purdue University as a second semester, second year student, saving an estimated $65,000 in college costs.

Colleges might do a better job at finding savings and efficiencies to keep college affordable.

Former George Washington University President, Stephen Trachtenberg once told me “You could run two complete colleges, with two complete faculties, in the facilities now used half the year for one. That’s without cutting the length of students’ vacations, increasing class sizes, or requiring faculty to teach more.”

Simply requiring one mandatory summer session for every student in four years—as Dartmouth College does—would improve his institution's bottom line by $10 million to $15 million dollars a year, he said at the time.

Southern New Hampshire University’s College for America just began offering a $10,000 bachelor’s degree.

Our FAST ACT proposed allowing students to use Pell Grants year-round, which would allow students to finish their education more quickly—compiling less debt.

And perhaps we members of Congress might even teach ourselves a lesson and stop allowing new Medicaid mandates to force states to spend money on Medicaid they might otherwise spend on higher education thereby keeping tuition down.

The federal government has made some efforts to address colleges that leave students with unaffordable student loan debt and unrealistic prospects for timely repayment of those loans, but these efforts have not been all that successful.

First, in 1990, out of concern about high levels of default, Congress established the first and only debt related accountability tool in statute. Colleges with high student loan default rates were prohibited from participating in federal student aid programs. Today, colleges where more than 30% of borrowers default on their loans over a 3-year period, or where 40% default within 1 year, become ineligible to receive federal student aid dollars.

But this tool may not be working very well because institutions have no reason to improve until they hit these high thresholds of default. For example, a college with an 18% cohort default rate is treated just the same as one with a 27% rate.

Second, the recent gainful employment regulation from this Administration is already a failure.

It’s a clumsy 945-page regulation defining just 2 words in the law targeting only one sector of higher education and it establishes a complicated and arbitrary definition of what is an affordable amount of debt.

Senator Reed, who is testifying today, believes that some colleges and universities should be responsible for a portion of the defaulted loans of students. It’s an important framework worth considering.

Others may have different ideas about how to structure a skin-in-the-game policy.

What is clear is that as a matter of principle and fairness, all institutions - whether public, private or for-profit – need to participate.

I do not believe that any institution, whether public or private, not for profit or for profit, should be exempt from any requirements that we may add to discourage over-borrowing and reduce college costs. But it might be appropriate to consider establishing multiple models of risk-sharing so that institutions with differing missions and student populations have different ways to comply.

We have a distinguished panel of witnesses and I look forward to hearing their thoughts.